Data Source and Methodology
The calculator applies Truth in Lending (Regulation Z) Appendix J methodology. Scheduled payments use the amortization formula; the effective APR is the internal rate of return that equates the present value of monthly payments to the net proceeds you receive after prepaid fees.
Formulas Used
Monthly rate: \( r = \dfrac{R}{12 \times 100} \)
Payment: \( \text{Payment} = \dfrac{P \cdot r}{1 - (1 + r)^{-n}} \) (if \( r = 0 \), then \( \text{Payment} = P / n \))
Net disbursed: \( \text{Net} = L - f_{\text{prepaid}} \)
APR (monthly IRR annualized): Find \( i \) so that \( \text{Net} = \sum_{k=1}^{n} \dfrac{\text{Payment}}{(1 + i)^{k}} \); then \( \text{APR} = (1 + i)^{12} - 1 \)
Interest: \( \text{Interest} = n \cdot \text{Payment} - P \)
Finance charge: \( \text{FinanceCharge} = \text{Interest} + f_{\text{prepaid}} + f_{\text{financed}} \)
Frequently Asked Questions
How does APR differ from the nominal rate?
The nominal rate determines the payment schedule. APR incorporates both that interest and mandatory finance charges, so it reflects the total annual cost of borrowing.
Which fees count toward finance charges?
Origination fees, discount points, and mandatory lender charges count. Optional add-ons, late fees, and government taxes generally do not. Refer to Regulation Z for specifics.
What if the payment is too small to amortize?
If the monthly payment cannot cover monthly interest, the balance grows. Increase the payment, shorten the term, or reduce the rate to compute a valid APR.